Focusing on Volatility Information Instead of Portfolio Weights as an Aid to Investor Decisions
39 Pages Posted: 9 Oct 2014 Last revised: 3 Sep 2020
Date Written: July 31, 2017
When faced with the challenge of forming a portfolio containing a risky and a risk-free asset, investors tend to apply the same portfolio weights independently of the volatility of the risky asset. This “percentage heuristic” can lead to different levels of portfolio risk when the same investor is presented with a more or a less risky asset. Using three experiments, we show that asking investors to choose the return distribution for their portfolio while keeping the exact portfolio weights unknown leads to greater similarity in levels of portfolio volatility (across different levels of risk of the risky asset) than asking investors to choose this distribution while additionally facing the portfolio weights. Higher consistency in risk taking is obtained both between and within test subjects.
Keywords: portfolio choice, risk-taking, volatility inadaptability, risk perception, 1/n heuristic
JEL Classification: G11
Suggested Citation: Suggested Citation